Construction Starts to Flatline in 2023

by Paul Deffenbaugh | 1 January 2023 12:00 am

Additionally, many owners in nonresidential market segments are in a quandary about whether they should proceed with construction projects at this time, or rather delay until there is a better consensus about economic prospects overall. But 2022 has seen an extraordinary development. Never before has there been a year filled with such a large dollar volume of mega project initiations. A mega project carries an estimated value of a billion dollars or more.

The kinds of mega projects that have received go-aheads this year have included new electric vehicle and battery manufacturing plants, semiconductor chipmaking facilities, and LNG exporting terminals. These are huge undertakings with work on them to proceed over several years. The companies behind these projects have long-term goals to be achieved, plus they have financing options other than a simple reliance on commercial bank loans.

Many of the largest upcoming capital spending projects will be in response to the worldwide goal of reaching net zero carbon emissions (NZE) by mid-century. The Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA) and the Chips Bill all include incentive tax measures and/or massive amounts of spending earmarked for environmentally friendly investments, particularly in renewable electric power. Recent legislation out of Washington has also incorporated a strategic bent, with an eye to bringing home jobs from abroad in key industrial sectors, such as computer hardware and electric battery manufacturing.

ConstructConnect’s grand total construction starts are expected to finish the year +10-to-+12% in dollar volume in 2022 versus 2021. Much of that gain, though, will be due to building material cost increases that were rampant earlier this year, but are moderating as 2023 approaches. The close-to-flatlining of the grand total starts volume in 2023 will be due to an easing in input costs, more so for materials than labor, which continues to be in scarce supply, and because of a natural pull-back in the number of outsized industrial projects that will go ahead versus the pattern in 2022.

Residential

Higher mortgage rates and worsening affordability are currently dampening the residential construction outlook, although single-family work is being impacted more than the multi-unit market. Units in the latter generally carry lower price tags. Over the longer term, fewer births, less immigration and, therefore, slowing population growth will be negative influences on home building. A counterweight, though, will come from intensifying migration within the U.S. (e.g., from the West Coast to the interior) and from a trending increase in the number of family formations due to an uptick in the number of individuals, young adults and older people, who are living on their own. The shift toward smaller cheaper multi-unit structures will accelerate.

Lodging

Hotel and motel construction activity, when plotted as either starts or put-in-place (PIP) figures, is the most clearly cyclical of all the type-of-structure sub-categories. The starts figures touched bottom in 2021 and have revived slightly in 2022. (Starts lead the PIP investment numbers.) With a turnaround in starts underway, climbing PIP statistics are likely to continue for some time. In the general population, there’s a tremendous appetite for travel, which was artificially suppressed by restrictions imposed to stop the spread of the coronavirus. Inoculations and a degree of herd immunity (i.e., with so many having already been COVID afflicted) have now allowed a revival in short- and long-distance outings, with accompanying overnight stays.

Offices

The ‘restocking’ of existing office buildings with workers appears to be gaining momentum. The most famous example of how some employers feel on the subject is Elon Musk’s directive to his newly acquired Twitter personnel that they must show up on-site. Nevertheless, many companies are staying fluid with their workplace rules. Widespread retirements among older workers have led to an acute staffing problem. Is there an instance when rapid inflation can be a friend to employers? Yes, when it scares veteran employees out of thoughts of escaping into their leisure years. But what is often most hated by those older employees is the traditional commute. Many of them love working from home. A stretched-out cap on new office construction is inevitable.

Retail, Warehouse, Restaurant

The dollar volumes of retail sales, made through both Internet selling sites and at walk-through store locations, have been quite strong this year. Much of the gain, though, has been due to inflation and accompanying pumped up prices for merchandise. That observation aside, shoppers freed of mask mandates, and comfortable with their employment prospects, are resuming their old patterns of frequenting local malls, seeking to browse, buy and intermingle. The half-decade plunge in bricks and mortar construction starts came to a halt in 2020. In 2021, they increased slightly, and they’ll do so again in 2022. The surge in warehouse construction activity that was prominent in the early days of the pandemic, however, has quieted down for the moment.

Health Care

Health care, moving on from the pandemic, is coming under the influence of two extraordinary trends. First is the increasing acceptance of telehealth with remote monitoring as an alternative to time spent in waiting rooms. This is promoting the establishment of medical clinics founded by specialists acting in partnership. Second, there is the undeniable aging of the population, which implies an acceleration in the demand for minor and major medical procedures. Giant multi-bed hospitals, often on college campuses and designated as teaching establishments, are prominent on upcoming large projects lists. Plus, the need for seniors’ care homes can only keep climbing.

Educational

In the last several years, there have been developments taking away from the prospects for educational facility construction. The negatives at the K-12 level have included fewer births in the U.S. and less immigration of families with young children. In higher education, foreign student enrolments have been way down, and there’s been a gravitation of virtual lecture hall teaching to the Internet. But going forward there are so many remarkable changes taking place in the labor marketplace with lucrative job opportunities in multiple new areas (e.g., the metaverse, AI, climate disaster mitigation, biotech, etc.), beefed up academic accessibility will be a must.

Amusement and Recreational

At the height of the pandemic, digital supplies of viewing material, through streaming and downloading, rose to supremacy versus other sources of entertainment. Access became so intense that some individuals and families eventually ran out of untapped material to watch when production in studios and at movie locations was shut down for health reasons. Now, those jobs have come roaring back. The entertainment industry worldwide was in take-off mode pre-COVID; look for it to soar even more. Investors gripping megaphones and clapper boards want to build more sound stages. Also, there continue to be professional sports teams with aspirations to build state of the art new stadiums (e.g., the NFL’s Tennessee Titans and Buffalo Bills).

Transportation

Prior to Spring 2020, when COVID infections reared up, there were multitudinous, ultra-large rapid transit, railroad and airport projects at various stages along the construction pipeline. As commuting and personal and business travel came to hard stops, almost all of those undertakings were put on hold. Would there ever be a rebound? It seems that question is being answered in the affirmative. Government funding for infrastructure works is helping with the decision-making. With respect to airport capital spending, baby boomers (aged 60 and older) have bucket lists and there are places around the globe they want to see. And who isn’t looking forward to riding on a hyperloop, once one or two of them moves beyond the pilot stage?

Manufacturing

The biggest 2022 year-to-date percentage-change increase among the put-in-place construction sub-categories has been in manufacturing, +12%. Providing reinforcement, the ‘starts’ dollar volume of industrial work so far this year has been more than double what it was last year. These gains are so emphatic due to the abundance of mega projects that have recently been initiated, with particular uplift coming from the motor vehicle, computer hardware and petrochemical sectors. It’s in the nature of starts that today’s billions of dollars-worth of groundbreakings will be spread over the next several years in terms of the work proceeding onsite. After a decade-plus of manufacturing jobs being sent offshore, the prevailing trend is for them to be repatriated.

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Alex Carrick is chief economist for Cincinnati-based ConstructConnect[7]. He is an awarded author of thousands of articles and is regularly quoted in major news outlets.

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